Small Firms Increasingly Need Directors and Officers Coverage

While directors and officers liability has been traditionally thought of as insurance for publicly traded companies, increasingly it’s smaller companies that account for the largest share of exposure among top decision-makers.

A study published by the news website Advisen found that over the past 10 years, small businesses accounted for 70% of all D&O insurance claims. And during that time, these claims increased 300% for small businesses, compared with 200% for large companies and 150% for mid-sized operations, according to the study.

Although privately held businesses don’t risk exposure to securities class-action suits, a business doesn’t have to have shareholders in order for its directors and/or officers to be personally sued.

Your directors and officers may also face exposure to lawsuits and regulatory actions that could seriously dent your company’s finances. Consider the following risks:

Breach of fiduciary duty – Investors sue a company alleging that some of its officers had personal connections to a third-party contractor the company hired to do some work. They accuse other officers and directors of breaching their duty of care in undertaking the project without properly investigating the qualifications of the contractor.

Failure to comply with workplace laws – An employee is terminated and then sues the directors and officers and the company for wrongful termination based on gender discrimination.

Theft of intellectual property – You hire a new vice president and his former employer sues him and your company, accusing him of stealing certain corporate licenses to market proprietary software, creating unfair competition and trademark infringement.

Misrepresentation – A company asks a supplier to build up its inventory because it expects an uptick in business. The supplier complies and then the company switches suppliers. The original supplier sues, alleging damages based on the promise of more business and subsequent failure to provide that business.

When you may want to consider D&O coverage:

If your company has relationships with vendors and customers that could in some way leave your directors or officers exposed.

If you intend to seek venture capital funding or attract other investors.

You have officers or directors who could be targeted by litigants over their management of company affairs.

BOX:

Low-priced policies for small firms

Many insurance companies now offer small business executive liability coverage starting at $1,500 per year to protect directors and officers.

D&O liability insurance protects corporate directors and officers in the event they are personally sued – often in addition to the company being sued – by investors, employees, vendors, competitors and customers, among other parties. The insurance protects directors and officers by covering legal fees, settlements and other costs; in addition, the coverage sometimes can extend to protect the company if it is named in a suit, as well.

Also, some new directors or officers may demand that you purchase D&O insurance as a condition of employment or serving, since they will not want to put their personal assets at risk. Outside investors may also demand that you purchase a policy before agreeing to fund your company.

Considerations when buying a policy

Should you limit coverage to directors and officers or include coverage for the entity, as well?

Make sure the policy will cover innocent directors if one member is found guilty of wrongdoing. Policies will cover allegations of criminal misconduct up to the point of adjudication.

Do you need additional coverage, which is usually sold in increments of $1 million of coverage?

Read the fine print to ensure that the policy covers a wide range of claims, from regulatory actions to criminal investigations and employee lawsuits.

Have a separate coverage limit if that coverage is bundled with an employment practices liability policy. This will ensure coverage for personal liability of directors and officers in the event a claim against the company depletes the EPL policy limit.